Introduction to Management Science, 11e (Taylor)

Chapter 12 Decision Analysis

1) A state of nature is an actual event that may occur in the future.

Answer: TRUE
Diff: 1 Page Ref: 538
Section Heading: Components of Decision Making
Keywords: state of nature

2) A payoff table is a means of organizing a decision situation, including the payoffs from different
decisions given the various states of nature.
Answer: TRUE
Diff: 1 Page Ref: 538
Section Heading: Components of Decision Making
Keywords: payoff table

3) The maximax criterion results in the maximum of the maximum payoffs.

Answer: TRUE
Diff: 2 Page Ref: 540
Section Heading: Decision Making without Probabilities
Keywords: maximax criterion

4) The maximin approach involves choosing the alternative with the highest payoff.
Answer: FALSE
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion

5) Regret is the difference between the payoff from the best decision and all other decision payoffs.
Answer: TRUE
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: minimax regret criterion

6) The minimax regret criterion minimizes the maximum regret.

Answer: TRUE
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: minimax regret criterion

7) The minimax regret criterion maximizes the minimum regret.

Answer: FALSE
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: minimax regret criterion

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8) The Hurwicz criterion is a compromise between the maximax and maximin criteria.
Answer: TRUE
Diff: 2 Page Ref: 542
Section Heading: Decision Making without Probabilities
Keywords: Hurwicz criterion

9) The Hurwicz criterion is a compromise between the minimax and minimin criteria.
Answer: FALSE
Diff: 2 Page Ref: 542
Section Heading: Decision Making without Probabilities
Keywords: Hurwicz criterion

10) The coefficient of optimism is a measure of the decision maker's optimism.

Answer: TRUE
Diff: 1 Page Ref: 542
Section Heading: Decision Making without Probabilities
Keywords: Hurwicz criterion

11) The Hurwicz criterion multiplies the best payoff by the coefficient of optimism.
Answer: TRUE
Diff: 1 Page Ref: 542
Section Heading: Decision Making without Probabilities
Keywords: Hurwicz criterion

12) The Hurwicz criterion multiplies the worst payoff by the coefficient of optimism.
Answer: FALSE
Diff: 1 Page Ref: 542
Section Heading: Decision Making without Probabilities
Keywords: Hurwicz criterion

13) A dominant decision is one that has a better payoff than another decision under each state of nature.
Answer: TRUE
Diff: 1 Page Ref: 543
Section Heading: Decision Making without Probabilities
Keywords: dominant decision

14) The appropriate criterion is dependent on the risk personality and philosophy of the decision maker.
Answer: TRUE
Diff: 3 Page Ref: 540
Section Heading: Decision Making without Probabilities
Keywords: decision making criteria

15) The maximax criterion is optimistic.

Answer: TRUE
Diff: 3 Page Ref: 540
Section Heading: Decision Making without Probabilities
Keywords: decision making criteria

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16) The maximin criterion maximizes the minimum regret.
Answer: FALSE
Diff: 1 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion

17) The minimax criterion minimizes the maximum payoff.

Answer: FALSE
Diff: 1 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: minimax criterion

18) Regret and opportunity loss mean the same thing.

Answer: TRUE
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: expected value of perfect information

19) The equal likelihood criterion assigns a probability of 0.5 to each state of nature.
Answer: FALSE
Diff: 1 Page Ref: 543
Section Heading: Decision Making without Probabilities
Keywords: equal likelihood criterion

20) Expected opportunity loss is the expected value of the regret for each decision.
Answer: TRUE
Diff: 2 Page Ref: 547
Section Heading: Decision Making with Probabilities
Keywords: expected opportunity loss, minimax regret criterion

21) When using decision trees, branches with the greatest expected value are selected.
Answer: TRUE
Diff: 1 Page Ref: 552
Section Heading: Decision Making with Probabilities
Keywords: decision trees

22) A decision tree is a diagram consisting of circular decision nodes, square probability nodes, and
branches.
Answer: FALSE
Diff: 1 Page Ref: 552
Section Heading: Decision Making with Probabilities
Keywords: decision trees

23) Additional information is used to alter the marginal probability of occurrence of an event in
Bayesian analysis.
Answer: TRUE
Diff: 1 Page Ref: 561
Section Heading: Decision Analysis with Additional Information
Keywords: Bayesian analysis

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24) A conditional probability is the probability that two events will occur simultaneously.
Answer: FALSE
Diff: 1 Page Ref: 561
Section Heading: Decision Analysis with Additional Information
Keywords: conditional probability

25) A posterior probability is the likelihood that an event has occurred after the decision maker has
reached a decision.
Answer: FALSE
Diff: 1 Page Ref: 562
Section Heading: Decision Analysis with Additional Information
Keywords: posterior (revised) probability

26) Events are mutually exclusive if one, and only one, can occur at a time.
Answer: TRUE
Diff: 1 Page Ref: 563
Section Heading: Decision Analysis with Additional Information
Keywords: mutually exclusive events

27) The expected value of perfect information divided by the expected value of sample information is
the efficiency of perfect information.
Answer: FALSE
Diff: 1 Page Ref: 567
Section Heading: Decision Analysis with Additional Information
Keywords: efficiency of sample information
AACSB: Analytic skills

28) When the ________ criterion is used, the maximum of the maximum payoffs is selected.
Answer: maximax
Diff: 1 Page Ref: 540
Section Heading: Decision Making without Probabilities
Keywords: decision making without probabilities maximax criterion

29) When the ________ criterion is used, the maximum of the minimum payoffs is selected
Answer: maximin
Diff: 1 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: decision making without probabilities, minimax criterion

30) ________ is the difference between the payoff from the best decision and all other decision payoffs.
Answer: Regret
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: regret, minimax regret criterion

31) The ________ is a compromise between the maximax and the maximin criterion.
Answer: Hurwicz criterion
Diff: 2 Page Ref: 532
Section Heading: Decision Making without Probabilities
Keywords: Hurwicz criterion
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32) The ________ is a measure of the decision makers optimism.
Answer: coefficient of optimism
Diff: 2 Page Ref: 542
Section Heading: Decision Making without Probabilities
Keywords: coefficient of optimism

33) A(n) ________ decision is one that has a better payoff than another decision under each state of
nature.
Answer: dominant
Diff: 2 Page Ref: 543
Section Heading: Decision Making without Probabilities
Keywords: dominant decision

34) A ________ structures decisions with a series of nodes.

Answer: decision tree
Diff: 1 Page Ref: 550
Section Heading: Decision Making without Probabilities
Keywords: decision trees

35) The ________ of sample information is the ratio of the expected value of sample information to the
expected value of perfect information.
Answer: efficiency
Diff: 1 Page Ref: 567
Section Heading: Decision Analysis with Additional Information
Keywords: expected value of sample information

36) When the ________ criterion is used, the decision maker selects the decision alternative that
minimizes the maximum regret.
Answer: minimax regret
Diff: 1 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: minimax criterion

37) A ________ decision tree illustrates a situation requiring a series of decisions.

Answer: sequential
Diff: 1 Page Ref: 556
Section Heading: Decision Making with Probabilities
Keywords: decision trees

38) ________ is a measure of personal satisfaciton derived from money.

Answer: Utility
Diff: 1 Page Ref: 568
Section Heading: Utility
Keywords: utility

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39) People who forgo a high expected value to avoid a disaster with a low probability are ________.
Answer: risk averters -or- risk averse
Diff: 1 Page Ref: 568
Section Heading: Decision Making with Probabilities
Keywords: risk averters, utility

40) The efficiency of sample information is the ratio of the expected value of sample information to
________.
Answer: the expected value of perfect information
Diff: 1 Page Ref: 567
Section Heading: Decision Analysis with Additional Information
Keywords: expected value of perfect information
AACSB: Analytic skills

41) The difference in the expected value with additional information and without additional information
is ________.
Answer: the expected value of sample information
Diff: 1 Page Ref: 566
Section Heading: Decision Analysis with Additional Information
Keywords: expected value of sample information
AACSB: Analytic skills

42) The efficiency of sample information multiplied by the expected value of perfect information is
________.
Answer: the expected value of sample information
Diff: 1 Page Ref: 567
Section Heading: Decision Analysis with Additional Information
Keywords: expected value of sample information
AACSB: Analytic skills

43) If only one of three events can occur at any given time, the events are ________.
Answer: mutually exclusive
Diff: 1 Page Ref: 563
Section Heading: Decision Analysis with Additional Information
Keywords: mutually exclusive events

44) If the decision maker receives additional information such that the marginal probabilities of certain
events should be modified, these revised probabilites are called ________.
Answer: posterior probabilities
Diff: 1 Page Ref: 562
Section Heading: Decision Analysis with Additional Information
Keywords: posterior (revised) probability

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A group of friends are planning a recreational outing and have constructed the following payoff table to
help them decide which activity to engage in. Assume that the payoffs represent their level of
enjoyment for each activity under the various weather conditions.

Weather
Cold Warm Rainy
S1 S2 S3

Bike: A1 10 8 6
Hike: A2 14 15 2
Fish: A3 7 8 9

45) If the group is optimistic, what decision should they make?

Answer: A2
Diff: 3 Page Ref: 540
Section Heading: Decision Making without Probabilities
Keywords: maximax criterion
AACSB: Analytic skills

46) If the group is conservative, what decision will they make?

Answer: A3
Diff: 3 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion
AACSB: Analytic skills

47) If the group chooses to minimize their maximum regret, what activity will they choose?
Answer: 3-way tie
Diff: 3 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: minimax regret criterion
AACSB: Analytic skills

48) If the probabilities of cold weather (S1), warm weather (S2), and rainy weather (S3) are 0.2, 0.4, and
0.4, respectively, then what decision should be made using the expected value criterion?
Answer: Ev(a1) = 7.6
Ev(a2) = 9.6 (best)
Ev(a3) = 8.2
Diff: 3 Page Ref: 546
Section Heading: Decision Making with Probabilities
Keywords: expected value criterion
AACSB: Analytic skills

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49) If the probabilities of cold weather (S1), warm weather (S2), and rainy weather (S3) are 0.2, 0.4, and
0.4, respectively, then what is the EVPI for this situation?
Answer: EVPI = 12.4 - 9.6 = 2.8
Diff: 3 Page Ref: 549
Section Heading: Decision Making without Probabilities
Keywords: expected value of perfect information
AACSB: Analytic skills

An investor is consider four different opportunities, A, B, C, or D. The payoff for each opportunity will
depend on the economic conditions, represented in the payoff table below.

Economic Condition
Poor Average Good Excellent
Investment (S1) (S2) (S3) (S4)

A 50 75 20 30
B 80 15 40 50
C -100 300 -50 10
D 25 25 25 25

50) What decision would be made under maximax?

Answer: compare 75, 80, 300, and 25. Choose investment C.
Diff: 3 Page Ref: 540
Section Heading: Decision Making without Probabilities
Keywords: maximax criterion
AACSB: Analytic skills

51) What decision would be made under maximin?

Answer: Compare 20, 15, -100, and 25. Choose investment D.
Diff: 3 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion
AACSB: Analytic skills

52) What decision would be made under minimax regret?

Answer: Compare 225, 285, 180, and 275. Select investment C.
Diff: 3 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: minimax regret criterion
AACSB: Analytic skills

53) If the probabilities of each economic condition are 0.5, 0.1, 0.35, and 0.05, respectively, what
investment would be made using the expected value criterion?
Answer: Investment B with an EMV of 58
Diff: 3 Page Ref: 546
Section Heading: Decision Making without Probabilities
Keywords: expected value of perfect information
AACSB: Analytic skills

8
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54) If the probabilities of each economic condition are 0.5, 0.1, 0.35, and 0.05, respectively, what is the
expected value of perfect information?
Answer: The EVPI is 28.5.
Diff: 3 Page Ref: 549
Section Heading: Decision Making without Probabilities
Keywords: expected value criterion
AACSB: Analytic skills

A manager has developed a payoff table that indicates the profits associated with a set of alternatives
under two possible states of nature.

Alt S1 S2

1 10 2
2 -2 8
3 8 5

55) If the manager uses maximin as the decision criterion, which of the alternatives should she choose?
Answer: maximin: Alt 3
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion
AACSB: Analytic skills

56) If the manager uses minimax regret as the decision criterion, which of the alternatives would she
choose?
Answer: Select alternative 3.

Alt S1 S2 worst

1 0 6 6
2 12 0 12
3 2 3 3 (min regret)
Diff: 2 Page Ref: 531
Section Heading: Decision Making without Probabilities
Keywords: minimax regret criterion
AACSB: Analytic skills

57) Use the expected value criterion to select the best alternative. Assume that the probability of S2 is
equal to 0.4.
Answer:
EV (Alt 1) = 0.6(10) + 0.4(2) = 6.8
EV (Alt 2) = 0.6(-2) + 0.4(8) = 2.0
EV (Alt 3) = 0.6(8) + 0.4(5) = 6.8
Select either alternative 1 or 3.
Diff: 2 Page Ref: 546
Section Heading: Decision Making without Probabilities
Keywords: expected value criterion
AACSB: Analytic skills

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Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
58) Compute the expected value of perfect information assuming that the probability of S2
is equal to 0.4.
Answer: EVPI = 0.6(10) + 0.4(8) - 6.8 = 2.4
Diff: 2 Page Ref: 549
Section Heading: Decision Making without Probabilities
Keywords: expected value of perfect information
AACSB: Analytic skills

The local operations manager for the IRS must decide whether to hire 1, 2, or 3 temporary workers. He
estimates that net revenues (in thousands) will vary with how well taxpayers comply with the new tax
code.

59) If he uses the maximin criterion, how many new workers will he hire?
Answer: 1
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion
AACSB: Analytic skills

60) If he uses the minimax regret criterion, how many new workers will he hire?
Answer: 2
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: minimax regret criterion
AACSB: Analytic skills

61) If he thinks the chances of low, medium, and high compliance are 20%, 30%, and 50%, respectively,
what are the expected net revenues for the number of workers he will decide to hire?
Answer: $50,000
Diff: 2 Page Ref: 547
Section Heading: Decision Making with Probabilities
Keywords: expected value criterion
AACSB: Analytic skills

62) If he thinks the chances of low, medium, and high compliance are 20%, 30%, and 50%, respectively,
what is the expected value of perfect information?
Answer: $26,000
Diff: 2 Page Ref: 549
Section Heading: Decision Making with Probabilities
Keywords: expected value of perfect information
AACSB: Analytic skills

10
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
A manufacturer must decide whether to build a small or a large plant at a new location. Demand at the
location can be either low or high, with probabilities estimated to be 0.4 and 0.6, respectively. If a small
plant is built, and demand is high, the production manager may choose to maintain the current size or to
expand. The net present value of profits is $223,000 if the firm chooses not to expand. However, if the
firm chooses to expand, there is a 50% chance that the net present value of the returns will be 330,000
and a 50% chance the estimated net present value of profits will be $210,000. If a small facility is built
and demand is low, there is no reason to expand and the net present value of the profits is $200,000.
However, if a large facility is built and the demand turns out to be low, the choice is to do nothing with a
net present value of $40,000 or to stimulate demand through local advertising. The response to
advertising can be either modest with a probability of .3 or favorable with a probability of .7. If the
response to advertising is modest, the net present value of the profits is $20,000. However, if the
response to advertising is favorable, then the net present value of the profits is $220,000. Finally, if the
large plant is built and the demand happens to be high, the net present value of the profits $800,000.

63) Draw a decision tree.

Answer:

Diff: 2 Page Ref: 556

Section Heading: Decision Making with Probabilities
Keywords: sequential decision tree
AACSB: Analytic skills

11
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64) Draw a decision tree and determine the payoff for each decision and event node. Which alternative
should the manufacturer choose?
Answer:

EV1 = (.3)(20,000) + (.7)((220,000) = $160,000

EV2 = (.5)(330,000) + (.5)((210,000) = $270,000
EV3 = (.4)(200,000) + (.6)((270,000) = $242,000
EV4 = (.4)(160,000) + (.6)((800,000) = $544,000
Since 544,000 > 242,000, build a large plant.
Diff: 3 Page Ref: 556
Section Heading: Decision Making with Probabilities
Keywords: sequential decision tree
AACSB: Analytic skills

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Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
65) If a student attends every management science class, the probability of passing the course is 0.80;
but if the student only attends randomly, then the probability of passing the course is 0.50. If a student
fails, he or she can take a makeup exam where the probability of passing is 0.60 if the student has
attended every class. This probability of passing the makeup exam drops to 0.10 if the student has
attended at random.

Passing the course is worth 5 credits. Full time attendance "costs" 3 credits in terms of energy and time,
whereas random attendance "costs" only 1 credit.

Use a decision tree to decide which is the best attendance pattern to adopt. Assume that all failing
students take the make up exam and that the payoff for failing is equal to 0.
Answer:

The expected value of attending all classes is 4.6 - 3 = 1.6.

The expected value of attending randomly is 2.75 - 1 = 1.75, so the student should attend at random.

Diff: 2 Page Ref: 540

Section Heading: Decision Making with Probabilities
Keywords: decision trees
AACSB: Analytic skills

13
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
The quality control manager for ENTA Inc. must decide whether to accept (A1), further analyze (A2), or
reject (A3) a lot of incoming material. Assume the following payoff table is available. Historical data
indicates that there is 30% chance that the lot is poor quality (S1), 50 % chance that the lot is fair quality
(S2), and 20% chance that the lot is good quality (S3).

66) What action would you choose according to maximax criterion?

Answer: (90 > 80 > 70), accept the lot, A1.
Diff: 2 Page Ref: 540
Section Heading: Decision Making without Probabilities
Keywords: maximax criterion
AACSB: Analytic skills

67) What action would you choose according to maximin criterion?

Answer: (10 < 20 < 40), reject the lot, A3.
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion
AACSB: Analytic skills

68) Construct the regret table.

Answer: Regret Table

Diff: 2 Page Ref: 541

Section Heading: Decision Making without Probabilities
Keywords: minimax criterion, regret table
AACSB: Analytic skills

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Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
69) What action would you choose according to minimax regret criterion?
Answer: Regret Table

(80 > 60 > 50), therefore, reject the lot.

Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: minimax criterion
AACSB: Analytic skills

70) What action would you choose according to expected value criterion?
Answer:
EV1 = (.3)(20) + (.5)(30) + (.2)(90) = 39
EV2 = (.3)(60) + (.5)(70) + (.2)(10) = 55
EV3 = (.3)(80) + (.5)(50) + (.2)(40) = 57
Since 57 > 55 > 39, reject the lot.
Diff: 2 Page Ref: 547
Section Heading: Decision Making with Probabilities
Keywords: expected value criterion
AACSB: Analytic skills

71) What is the maximum amount that you would be willing to pay for perfect information?
Answer: Expected payoff with perfect information = (.3)(80) + (.5)(70) + (.2)(90) = 77
EVPI = 77 - max (EV) = 77 -57 = 20
Diff: 3 Page Ref: 549
Section Heading: Decision Making with Probabilities
Keywords: expected value of perfect information
AACSB: Analytic skills

72) Lucky Lucy is playing the slots in Reno, Nevada, holding her last silver dollar. There are three
possible payoffs if she wins: one cherry, $1; two cherries, $5; or three cherries, $50. Anything else on
the slot machine loses.

Construct the payoff table for Lucky Lucy.

Answer:

Diff: 2 Page Ref: 540

Section Heading: Decision Making without Probabilities
Keywords: payoff table
AACSB: Analytic skills
15
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Napoleon is contemplating four institutions of higher learning as options for a Masters in Business
Administration. Each university has strong and weak points and the demand for MBA graduates is
uncertain. The availability of jobs, student loans, and financial support will have a significant impact on
Napoleon's ultimate decision. Vanderbilt and Seattle University have comparatively high tuition, which
would necessitate Napoleon take out student loans resulting in possibly substantial student loan debt. In
a tight market, degrees with that cachet might spell the difference between a hefty paycheck and a
piddling unemployment check. Northeastern State University and Texas Tech University hold the
advantage of comparatively low tuition but a more regional appeal in a tight job market. Napoleon
gathers his advisory council of Kip and Pedro to assist with the decision. Together they forecast three
possible scenarios for the job market and institutional success and predict annual cash flows associated
with an MBA from each institution. All cash flows in the table are in thousands of dollars.

School Scenario 1 Scenario 2 Scenario 3

Vanderbilt 95 20 -10
Texas Tech 55 60 60
Seattle 90 10 80
Northeastern State 65 50 60

73) Kip tends to be extremely optimistic. Which decision making criterion would he naturally select and
what conclusion would he recommend to Napoleon? Why?
Answer: Maximax is the optimistic criterion, which would result in the selection of Vanderbilt as it has
the best of the best payoffs among all alternatives.
Diff: 2 Page Ref: 539-545
Section Heading: Decision Making without Probabilities
Keywords: maximax criterion
AACSB: Analytic skills

74) Pedro is extremely pessimistic. Which decision making criterion would he naturally select and what
conclusion would he recommend to Napoleon? Why?
Answer: Maximin is the pessimist's criterion. This would result in the selection of Texas Tech
University by virtue of its $55,000 payoff being higher than all other alternatives' worst outcomes.
Diff: 2 Page Ref: 539-545
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion
AACSB: Analytic skills

75) Napoleon doesn't know what to think, since he has no idea which scenario will happen. Which
criterion is he well-suited for and what is his decision?
Answer: Napoleon is an equally-likely decision maker in this example, so he would opt for Seattle
University and its $60,000 per year average.
Diff: 2 Page Ref: 539-545
Section Heading: Decision Making without Probabilities
Keywords: equal likelihood criterion
AACSB: Analytic skills

16
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
76) Summer bursts into the meeting and announces that there's another way to consider the issue. Since
Napoleon will have to live with his choice for the rest of his life, he might consider selecting the
alternative that will cause him the least pain in hindsight when he compares his outcome with what he
might have gained. Which criterion is she talking about, what is the best school for this criterion, and
why?
Answer: This is the minimax regret criterion. Northeastern State University is the MBA of choice under
this crterion with a maximum regret of only $30,000 per year.
Diff: 2 Page Ref: 539-545
Section Heading: Decision Making without Probabilities
Keywords: minimax regret criterion
AACSB: Analytic skills

77) Napoleon's Uncle Rico believes that the scenarios are not necessarily equally likely, and suggests
that the likelihood of occurrence of Scenario 2 is 0.4 and the likelihood of occurrence of Scenarios 1 and
3 are both 0.3. What two criteria are most appropriate and what is the resulting decision?
Answer: The two criteria are expected monetary value and expected opportunity loss. The EMV is
highest for Texas Tech University at $58,500 and the EOL is the lowest for Texas Tech University at
$18,000.
Diff: 2 Page Ref: 546-547
Section Heading: Decision Making with Probabilities
Keywords: expected opportunity loss
AACSB: Analytic skills

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Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
78) Consider the following decision tree.

What is the expected value at node 4?

Answer: $600
Diff: 1 Page Ref: 556
Section Heading: Decision Making with Probabilities
Keywords: expected value, decision trees
AACSB: Analytic skills

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Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
79) Consider the following decision tree.

What is the value associated with node 3?

Answer: $2,500
Diff: 2 Page Ref: 556
Section Heading: Decision Making without Probabilities
Keywords: expected value, decision trees
AACSB: Analytic skills

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Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
80) Consider the following decision tree.

Which decision, A or B, is best? What is the expected value of this decision?

Answer: A, expected payoff = $2,100
Diff: 2 Page Ref: 557
Section Heading: Decision Making with Probabilities
Keywords: expected value, decision trees
AACSB: Analytic skills

81) The maximax criterion results in the

A) maximum of the minimum payoffs.
B) maximum of the maximum payoffs.
C) minimum of the maximum payoffs.
D) minimum of the minimum payoffs.
Answer: B
Diff: 1 Page Ref: 540
Section Heading: Decision Making without Probabilities
Keywords: maximax criterion

82) The maximin criterion results in the

A) minimum of the maximum payoffs.
B) maximum of the maximum payoffs.
C) maximum of the minimum payoffs.
D) minimum of the minimum payoffs.
Answer: C
Diff: 1 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion

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83) Regret is the difference between the payoff from the
A) best decision and all other decision payoffs.
B) worst decision and all other decision payoffs.
C) best decision and the worst decision payoffs.
D) none of the above
Answer: A
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: regret, minimax regret criterion

84) The ________ minimizes the maximum regret.

A) maximax regret criterion
B) minimax regret criterion
C) minimin regret criterion
D) maximin regret criterion
Answer: B
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: minimax regret criterion

85) The minimax regret criterion

A) maximizes the minimum regret.
B) minimizes the minimum regret.
C) minimizes the maximum regret.
D) maximizes the maximum regret.
Answer: C
Diff: 1 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: minimax regret criterion

86) Determining the worst payoff for each alternative and choosing the alternative with the best worst is
called
A) maximin.
B) minimin.
C) maximax.
D) minimax.
Answer: A
Diff: 1 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion

87) The maximin approach to decision making refers to

A) minimizing the maximum return.
B) maximizing the minimum return.
C) maximizing the maximum return.
D) minimizing the minimum return.
Answer: B
Diff: 1 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion
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Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
88) The term opportunity loss is most closely related to
A) maximin regret.
B) maximax regret.
C) minimax regret.
D) minimin regret.
Answer: C
Diff: 2 Page Ref: 531
Section Heading: Decision Making without Probabilities
Keywords: expected opportunity loss, minimax regret criterion

89) The Hurwicz criterion is a compromise

A) between the maximin and minimax criteria.
B) between the minimax and maximax criteria.
C) between the maximax and maximin criteria.
D) none of the above
Answer: C
Diff: 2 Page Ref: 542
Section Heading: Decision Making without Probabilities
Keywords: Hurwicz criterion

90) The Hurwicz criterion multiplies the

A) best payoff by the coefficient of optimism.
B) worst payoff by the coefficient of optimism.
C) best payoff by the worst payoff.
D) none of the above
Answer: A
Diff: 1 Page Ref: 542
Section Heading: Decision Making without Probabilities
Keywords: Hurwicz criterion

91) The basic decision environment categories are

A) certainty.
B) risk.
C) uncertainty.
D) all of the above
Answer: D
Diff: 2 Page Ref: 538
Section Heading: Decision Making without Probabilities
Keywords: decision making

22
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
Napoleon is contemplating four institutions of higher learning as options for a Masters in Business
Administration. Each university has strong and weak points and the demand for MBA graduates is
uncertain. The availability of jobs, student loans, and financial support will have a significant impact on
Napoleon's ultimate decision. Vanderbilt and Seattle University have comparatively high tuition, which
would necessitate Napoleon take out student loans resulting in possibly substantial student loan debt. In
a tight market, degrees with that cachet might spell the difference between a hefty paycheck and a
piddling unemployment check. Northeastern State University and Texas Tech University hold the
advantage of comparatively low tuition but a more regional appeal in a tight job market. Napoleon
gathers his advisory council of Kip and Pedro to assist with the decision. Together they forecast three
possible scenarios for the job market and institutional success and predict annual cash flows associated
with an MBA from each institution. All cash flows in the table are in thousands of dollars.

School Scenario 1 Scenario 2 Scenario 3

Vanderbilt 95 20 -10
Texas Tech 55 60 60
Seattle 90 10 80
Northeastern State 65 50 60

92) Under which decision making criterion is Vanderbilt University the optimal choice?
A) maximax
B) maximin
C) minimax regret
D) equally likely
Answer: A
Diff: 2 Page Ref: 539-545
Section Heading: Decision Making without Probabilities
Keywords: maximax criterion
AACSB: Analytic skills

93) Under which decision making criterion is Texas Tech University the optimal decision?
A) maximax
B) maximin
C) minimax regret
D) equally likely
Answer: B
Diff: 2 Page Ref: 539-545
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion
AACSB: Analytic skills

94) Under which criterion is Seattle University the optimal decision?

A) maximax
B) maximin
C) minimax regret
D) equally likely
Answer: D
Diff: 2 Page Ref: 539-545
Section Heading: Decision Making without Probabilities
Keywords: equal likelihood criterion
AACSB: Analytic skills
23
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
95) Under which criterion is Northeastern State University the optimal decision?
A) maximax
B) maximin
C) minimax regret
D) equally likely
Answer: C
Diff: 2 Page Ref: 539-545
Section Heading: Decision Making without Probabilities
Keywords: minimax regret criterion
AACSB: Analytic skills

96) Suppose that the likelihood for each of the scenarios 1 through 3 is 0.3, 0.4, and 0.3, respectively.
What is the optimal decision under the expected opportunity loss criterion?
A) Vanderbilt University
B) Texas Tech University
C) Seattle University
D) Northeastern State University
Answer: B
Diff: 2 Page Ref: 539-545
Section Heading: Decision Making with Probabilities
Keywords: expected opportunity loss
AACSB: Analytic skills

97) The basic decision environment categories are

A) certainty and risk.
B) risk and uncertainty.
C) certainty and uncertainty.
D) certainty, uncertainty and risk.
Answer: D
Diff: 2 Page Ref: 538
Section Heading: Decision Making without Probabilities
Keywords: decision making

98) The Hurwicz criterion

A) multiplies the worst payoff by one minus the coefficient of optimism.
B) multiplies the best payoff by one minus the coefficient of optimism.
C) is a compromise between the minimax and maximin criteria.
D) all of the above
Answer: A
Diff: 1 Page Ref: 542
Section Heading: Decision Making without Probabilities
Keywords: Hurwicz criterion

24
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
99) The appropriate criterion is dependent on
A) the risk personality of the decision maker
B) the number of nodes in the decision tree.
C) the magnitude of the payoffs.
D) none of the above
Answer: A
Diff: 3 Page Ref: 539-545
Section Heading: Decision Making without Probabilities
Keywords: decision making

100) The ________ is a measure of the decision maker's optimism.

A) equal likelihood criterion
B) dominant decision
C) coefficient of optimism
D) opportunity loss
Answer: C
Diff: 2 Page Ref: 542
Section Heading: Decision Making without Probabilities
Keywords: coefficient of optimism, Hurwicz criterion

101) The ________ multiplies the decision payoff for each state of nature by an equal weight.
A) dominant decision
B) coefficient of optimism
C) equal likelihood criterion
D) none of the above
Answer: C
Diff: 2 Page Ref: 543
Section Heading: Decision Making without Probabilities
Keywords: equal likelihood criterion

102) A ________ is one that has a better payoff than another decision under each state of nature.
A) coefficient of optimism
B) equal likelihood criterion
C) dominant decision
D) none of the above
Answer: C
Diff: 2 Page Ref: 543
Section Heading: Decision Making without Probabilities
Keywords: dominant decision

25
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
103) A business owner is trying to decide whether to buy, rent, or lease office space and has constructed
the following payoff table based on whether business is brisk or slow.

The maximax strategy is

A) Buy.
B) Rent.
C) Lease.
D) Brisk.
Answer: A
Diff: 1 Page Ref: 540
Section Heading: Decision Making without Probabilities
Keywords: maximax criterion
AACSB: Analytic skills

104) A business owner is trying to decide whether to buy, rent, or lease office space and has constructed
the following payoff table based on whether business is brisk or slow.

The maximin strategy is

A) Buy.
B) Rent.
C) Lease.
D) Brisk.
Answer: C
Diff: 2 Page Ref: 541
Section Heading: Decision Making without Probabilities
Keywords: maximin criterion
AACSB: Analytic skills

26
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
105) A business owner is trying to decide whether to buy, rent, or lease office space and has constructed
the following payoff table based on whether business is brisk or slow.

The equal likelihood criterion strategy is

A) Buy.
B) Rent.
C) Lease.
D) Brisk.
Answer: C
Diff: 2 Page Ref: 543
Section Heading: Decision Making without Probabilities
Keywords: equal likelihood criterion
AACSB: Analytic skills

106) A business owner is trying to decide whether to buy, rent, or lease office space and has constructed
the following payoff table based on whether business is brisk or slow.

If the probability of brisk business is .40 and for slow business is .60, the expected value of perfect
information is:
A) 12
B) 55
C) 57
D) 69
Answer: A
Diff: 2 Page Ref: 549
Section Heading: Decision Making without Probabilities
Keywords: expected value of perfect information
AACSB: Analytic skills

107) The ________ is computed by multiplying each decision outcome under each state of nature by the
probability of its occurrence.
A) expected value
B) expected value of perfect information
C) expected opportunity loss
D) none of the above
Answer: A
Diff: 2 Page Ref: 546
Section Heading: Decision Making with Probabilities
Keywords: expected value
27
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
108) The ________ is the expected value of the regret for each decision.
A) expected value
B) expected opportunity loss
C) expected value of perfect information
D) none of the above
Answer: B
Diff: 2 Page Ref: 547
Section Heading: Decision Making with Probabilities
Keywords: expected opportunity loss

109) A tabular presentation that shows the outcome for each decision alternative under the various
possible states of nature is called a
A) decision tree.
B) payoff table.
C) feasible region.
D) payback matrix.
Answer: B
Diff: 2 Page Ref: 538
Section Heading: Components of Decision Making
Keywords: payoff table

110) The ________ is the maximum amount a decision maker would pay for additional information.
A) expected opportunity loss
B) expected value
C) expected value of perfect information
D) bid price
Answer: C
Diff: 2 Page Ref: 549
Section Heading: Decision Making with Probabilities
Keywords: expected value of perfect information

111) A decision tree is a diagram consisting of

A) branch angles that vary as likelihoods increase.
B) triangle probability nodes.
C) branches representing decision alternatives.
D) perfect information.
Answer: C
Diff: 1 Page Ref: 540
Section Heading: Decision Making with Probabilities
Keywords: decision trees

28
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
112) In ________ additional information is used to alter the marginal probability of the occurrence of an
event.
A) Bayesian analysis
B) decision analysis
C) probability analysis
D) decision making under certainty
Answer: A
Diff: 2 Page Ref: 561
Section Heading: Decision Analysis with Additional Information
Keywords: Bayesian analysis

113) A ________ probability is the probability that an event will occur given that another event has
already occurred.
A) posterior
B) conditional
C) marginal
D) low
Answer: B
Diff: 2 Page Ref: 561
Section Heading: Decision Analysis with Additional Information
Keywords: conditional

114) A ________ probability is the altered marginal probability of an event based on additional
information.
A) marginal
B) conditional
C) posterior
D) none of the above
Answer: C
Diff: 2 Page Ref: 562
Section Heading: Decision Analysis with Additional Information
Keywords: posterior

115) The efficiency of sample information is the ratio of the expected value of sample information to the
A) expected value of perfect information.
B) expected value.
C) utilization rate.
D) coefficient of optimism.
Answer: A
Diff: 2 Page Ref: 567
Section Heading: Decision Analysis with Additional Information
Keywords: efficiency of sample information

29
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
116) The expected value of sample information
A) is never more than EVPI.
B) can be greater or less than EVPI.
C) can be positive or negative.
D) is equivalent to the EVPI.
Answer: A
Diff: 2 Page Ref: 566
Section Heading: Utility
Keywords: efficiency of sample information

117) People who forgo a high expected value to avoid a disaster with a low probability are
A) risk takers.
B) risk averters.
C) risk calculators.
D) risk predictors.
Answer: B
Diff: 1 Page Ref: 568
Section Heading: Utility
Keywords: risk averters, utility

118) People who take a chance on a bonanza with a very low probability of occurrence in lieu of a sure
thing are
A) risk takers.
B) risk averters.
C) risk calculators.
D) risk predictors.
Answer: A
Diff: 1 Page Ref: 568
Section Heading: Utility
Keywords: risk takers, utility

119) Utiles are units of ________ measures of utility.

A) quantitative
B) objective
C) subjective
D) qualitative
Answer: C
Diff: 3 Page Ref: 558
Section Heading: Utility
Keywords: utility

30
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall
A small entrepreneurial company is trying to decide between developing two different products that they
believe they can sell to two potential companies, one large and one small. If they develop Product A,
they have a 50% chance of selling it to the large company with annual purchases of about 20,000 units.
If the large company won't purchase it, then they think they have an 80% chance of placing it with a
smaller company, with sales of 15,000 units. On the other hand if they develop Product B, they feel
they have a 40% chance of selling it to the large company, resulting in annual sales of about 17,000
units. If the large company doesn't buy it, they have a 50% chance of selling it to the small company
with sales of 20,000 units.

120) What is the probability that Product A will being purchased by the smaller company?
A) 0.8
B) 0.5
C) 0.4
D) 0.2
Answer: C
Diff: 2 Page Ref: 552
Section Heading: Decision Making with Probabilities
Keywords: decision trees
AACSB: Analytic skills

121) What is the probability that Product B will being purchased by the smaller company?
A) 0.8
B) 0.5
C) 0.4
D) 0.3
Answer: D
Diff: 2 Page Ref: 550
Section Heading: Decision Making with Probabilities
Keywords: decision trees
AACSB: Analytic skills

122) How many units of Product A can they expect to sell?

A) 20,000
B) 17,000
C) 16,000
D) 15,000
Answer: C
Diff: 2 Page Ref: 550
Section Heading: Decision Making with Probabilities
Keywords: decision trees
AACSB: Analytic skills

31
Copyright © 2013 Pearson Higher Education, Inc. Publishing as Prentice Hall